Warren Buffet said that „risk comes from not knowing what you’re doing” and that is one major cause of bad investments. It’s true that plans don’t always work out but talking money must involve some kind of perspective for future objectives and means of achieving them. Therefore, what are some important aspects you must consider before investing in a company, so that your money doesn’t go down the drain?
Review their business model
A business model is the blueprint of a company, the book of past and current triumphs and the foundation for all the future endeavors targeting success and profit. It’s important to understand exactly what you are investing in: the concept, the product, the target market, the profitability and other financial aspects. At the same time, by understanding how the business works, you understand the person that owns it too. You can gain perspective from a different standpoint, while you hold onto the investor mindset as well.
Evaluate the revenue history, net income and profit margin
Revenue is also known as gross sales and while it primarily represents the total amount of income a company generates by selling services or products, net income translates into profit or, in layman’s terms, total earnings after depreciation and other costs or taxes are subtracted. Examining the two gives you a look at the company growth rate, net income ultimately exposing whether the company is profitable or not.
Another thing to consider before investing is the profit margin, also known as net profit margin. It comes as percentages and it expresses the total revenues of a business. The next thing seems obvious: the higher or the steadier the profit margin, the bigger the chances to get your hands on a good company.
Assess the P/E and D/E ratio
A P/E ratio can be understood as the market’s perception about a company. Knowing a business’ Price-to-earnings ratio makes it easier to examine whether their stocks are overpriced or not and to get to that, the easiest way is to compare the current stock price with the annual earnings-per-share (to calculate EPS you divide the net profit by total outstanding shares. The D/E or Debt-to-Equity ratio compares the company’s total liabilities to the equity of shareholders. Why would you need to know this? To see how well they manage their debt.
Examine the stability and overall management of the company
Saying that a leader makes or breaks a team isn’t a myth. Great results come from good management and highly engaged employees. Talk with the CEO about company culture, evaluate the management team and see how smooth business strategy execution is and find out about the company’s reputation and past issues. Be one with them for a bit and see how you match in terms of objectives, vision and possible changes, then take a step back and analyze the overall stability of the business. Although catching the wave is exciting, especially if the company performance looks top-notch, being prepared for anything comes first.
Think carefully about risk and return
Any investment is tricky and there is no success without risks taken. But, as I previously said, being prepared is better than being hit when you least expect it. That’s why should take on a risk that you can manage and find a risk/reward ratio that will not leave you penniless. The risk/reward ratio is calculated by dividing the amount of money that can be lost in case the price of an asset goes south by the amount of profit the investor expects to gain from the investment. This ratio is used to assess the potential profit and potential loss of an investment.
Don’t forget your reason for investing
Keep in mind your reason for investing at all times. Whether you’re seeking a big return on investment, looking to diversify your investments or you just hunt for undervalued companies, it must be a top-of-mind issue for you. That’ll help when the need to make big decisions shows up.
Are these all the things to consider before investing?
Of course not. There are a lot more aspects to keep your eyes on, like trends and the competitors swarming around, but we believe these to come first on the priority list.
Did you know?
Although hit by the pandemic, investors are still busy working. An analysis conducted by Mordor Intelligence shows that during this past year, three categories of investments have shown massive growth and are still going strong: venture capital, private equity and M&A. FinTech is the main target for their investments and it looks like it will be in the future as well.
Juggler of words and wizard of controversial ideas, I am here to share with you the world of investors as it is and as it could be.
Putting together my B.A. in foreign languages, M.A. in international development and all the knowledge acquired through Mentori de Romania, I am here to show you that holding a pen – or in this case, typing on a keyboard – clicks with me best.
Juggler of words and wizard of controversial ideas, I am here to share with you the world of investors as it is and as it could be. Putting together my B.A. in foreign languages, M.A. in international development and all the knowledge acquired through Mentori de Romania, I am here to show you that holding a pen – or in this case, typing on a keyboard – clicks with me best.